Term Life vs. Whole Life Insurance: Which Is Right for You?
If you’ve put off looking into a life insurance policy, you’re not alone.
Whether it’s the fear of realizing and acknowledging our own mortality or the fact that it’s nearly impossible to sift through a sea of life insurance rates and quotes, there’s no shortage of barriers that stop us from buying insurance.
Plus, tomorrow always seems like a better time than today.
But the reality is that if we want to protect our families, most of us will need to stop procrastinating and purchase life insurance eventually.
So now that you recognize that you can’t ignore life insurance like the plague, what do you need to know about it?
Well, for starters, there are two main categories of life insurance on the market:
- Term life insurance
- Whole life (or permanent life) insurance
What’s the difference?
Term life insurance is usually a smarter investment for a few reasons.
For one, it’s more affordable. Like $30/month vs. $150/month more affordable. That’s huge!
Why is the difference so big? Term life insurance offers protection on the years that you need it and goes away when you don’t.
There comes a point in your life—at retirement—where your family no longer relies on your regular income to maintain their lifestyle. So if you were to pass away, your family wouldn’t have to deal with a financial hardship. (They’re living independent of your savings already.) This is a time when it doesn’t make sense to have life insurance anymore. And the good thing is that it correlates with the time when life insurance gets way more expensive. Term life insurance gives you the flexibility to avoid paying for the protection during those years when it’s most expensive.
In this article, we’ll cover all the basics of term life insurance and whole life insurance policies so that you can feel more confident about choosing a policy that makes sense for you.
Comparing Term and Whole Life Insurance
Life insurance is designed to provide for your loved ones financially if the unthinkable happens.
There are many differences between term life and whole life insurance. To understand why term life insurance is a better investment, you need to understand how each type of insurance works.
A cheat sheet for comparing term and whole life insurance
|Term life insurance||Whole life insurance|
|Choice of policy length||✓|
|Rates locked in||✓||✓|
|Guaranteed death benefit||✓||✓|
|Accumulates cash value||✓|
What Is Whole Life Insurance?
Whole life insurance is sometimes called cash value insurance or permanent life insurance. The coverage lasts for your entire life. This might seem like a great deal on the surface. After all, you’re going to die at some point. And wouldn’t you want to protect your family for as long as possible?
Whole life insurance premiums are usually much higher than the premiums on term life insurance policies, but they tend to stay the same no matter your age. That’s because your premiums are designed to build cash value over your life. But don’t be fooled: this is NOT a cost-free financial investment, and it turns out to be much more expensive and inflexible than other ways of investing your money.
Remember, life insurance is meant to replace your income only if you pass away. It’s not designed to help you invest money efficiently. There are many better, more profitable ways to invest your finances.
Pros and cons of whole life insurance
- Insurance for life: Whole life insurance never expires, so you can keep it for as long as you need it.
- Forced savings: Even though it’s an expensive way to invest your money, it can force you to save funds every month.
- Price: Whole life insurance is a lot more expensive than term life insurance (up to a whopping 10x the cost!).
- Complicated: Whole life insurance is much less straightforward than term insurance. You’ll want to understand all the fine print before buying this kind of policy.
- Inflexible: There are usually penalties for cancelling early.
- High interest rates: In most cases, the rate of return you’ll receive on the investment component of this policy is lower than what you’d get with alternative options (like RRSPs and TFSAs).
What Is Term Life Insurance?
Term life insurance provides coverage for a predetermined amount of time, usually 10–30 years. If you pass away during this time, your beneficiaries will get the amount of money you’re covered for. Your loved ones can then use this money to replace your income, pay off debt or a mortgage, pay for schooling, or cover other expenses.
If your policy expires or you stop paying the premiums, the coverage ends and the contract is over.
Term life insurance policies have much lower premiums than whole life insurance policies because they have no cash value unless you die during the course of the policy. The premiums for term life insurance usually increase each time you renew the policy, but it’s still a better financial investment than whole life insurance.
Pros and Cons of Term Life Insurance
- Straightforward: Term life insurance is straightforward and the policies are easy to understand, so you don’t have to worry about cancellation charges, hidden fees, or other risks (those things that are usually buried in sneaky fine print).
- Price: Term life insurance can be 6–10x cheaper for the same amount of coverage. The average cost is about $30/month vs. over $150/month for whole life policies.
- Flexibility: You can cancel term life insurance at any time.
- Expiration: Term life insurance eventually expires. If you still want coverage after that point, you’ll need to shop around for a new policy. The good news is that most term life insurance products offer features that let you continue your coverage after the term ends without having to show proof of good health or go through additional medical underwriting. This gives you some protection against getting sick because your renewal is guaranteed.
Cost comparison of term vs. whole life insurance
Whole life insurance can be up to 10x more expensive than a comparable term life policy. The chart below compares the monthly cost of a 20-year term policy and a whole life policy for men and women at different ages.
|$250,000 20-year term life insurance||$250,000 whole life insurance|
|Male, aged 30||$18/month||$135/month|
|Female, aged 30||$15/month||$121/month|
|Male, aged 40||$28/month||$204/month|
|Female, aged 40||$22/month||$178/month|
|Male, aged 50||$72/month||$327/month|
|Female, aged 50||$51/month||$279/month|
How to Purchase Life Insurance
There are several ways to buy a life insurance policy. But no matter how you get it, you want to make sure that you’re receiving honest and unbiased advice when talking to a local life insurance broker.
Why is this so important? Insurance companies pay their agents significant commissions for selling whole life policies. In fact, more than 100% of your first year’s premiums can go toward the agent’s commission. That’s no chump change.
Even though an agent’s commissions for selling term life insurance policies are about the same percentage of the first year’s premiums as they are for a whole life policy, term life insurance costs much less. As a result, agents make up to 10x more by selling whole life insurance policies than term life insurance policies. So be conscious of these biases when getting advice!
How to Get Life Insurance Quotes
The easiest way to get quotes for either term life insurance or whole life insurance policies is to go online. Some websites let you get quotes from multiple companies at the same time. These sites make it easier to compare prices.
Once you fill in your date of birth, gender, and smoking status, most online companies will be able to generate a set of quotes for you within seconds. Keep in mind, though, that these are estimates based on “healthy" or “standard" rates. If you have a health condition, they may underestimate your life insurance quote.
Term Life Insurance Without a Medical Exam
It’s possible to buy a term life insurance policy without providing detailed personal information or getting a medical exam. This may seem like an attractive option, especially if you have a busy schedule or hate getting poked and prodded. However, if you purchase a term life insurance policy without a medical exam, expect to pay higher premiums.
Some insurance companies sell life insurance policies without asking any questions about your medical history, but they tend to have higher premiums and lower coverage amounts. This is because they are taking on a lot more risk by insuring people without knowing their risk factors. And they have to protect themselves against this risk somehow.
Term Life Insurance with a Medical Exam
Even though it’s seems inconvenient, there are many benefits to completing a medical exam for your life insurance policy. The insurance company uses the medical exam to assess your overall risk of dying prematurely and set your premiums based on risk. So if you’re healthy, completing a medical exam will likely help you get a lower rate.
Fortunately, you can often schedule the medical exam to take place at your home or workplace. (Why can’t all doctor’s appointments be like this?) The exam typically lasts about 30 minutes and includes things like a blood test, urinalysis, and general health assessment. The good news is that several insurance companies are forgoing blood and urine tests for policies under $1,000,000 of coverage. There’s no downfall to this—you’ll still be eligible for very low life insurance rates. Score!
How Much Term Life Insurance Should You Purchase?
Many financial experts recommend purchasing a term life insurance policy for 10x to 15x your annual income. If your beneficiary invests this amount of money in safe stocks and lives off the interest, this amount should replace your income indefinitely. However, this is usually a lot more than what we recommend at PolicyMe! Our sophisticated life insurance checkup allows us to identify and recommend the right amount of life insurance for your specific situation. This way, you won’t end up overpaying for your coverage.
Keep in mind that it’s smart to purchase life insurance for both partners or spouses, even if one stays at home with children. At first, this may not seem to make sense. After all, if one partner isn’t earning an income, what source of money is there to replace? But consider how much you’d have to pay in childcare and other costs if the stay-at-home spouse passed away. Depending on your situation, these costs could really add up.
Of course, your long-term goal should be to pursue financial stability so that when your term life insurance policy expires in 20 or 30 years, you can live comfortably off your savings and investments. As you become more financially stable, you have less of a need for life insurance. That’s why term life insurance may be the best option for you!